The US bitcoin exchange, Tradehill, is seeking to improve its security by partnering with online identity verification vendor miiCard to strengthen its procedures for dealing in the digital currency. Meanwhile, the US Commodity Futures Trading Commission (CFTC) has said it may need to regulate the cyber-currency.
miiCard will give users at the TradeHill bitcoin exchange a digital passport that can be used to prove they are who they say they are, which is a service the security vendor provides to others online in real-time to verify identities. The user themselves, which may include treasurers, banks and private citizens, control their own identify in this scenario, and can take their passport with them wherever they go.
In the case of TradeHill this means users must use their miiCard before withdrawing any funds from the bitcoin exchange, making the platform, which was relaunched in March this year after security problems last summer, newly compliant with anti-money laundering (AML) and know your customer (KYC) tracking regulations. The lack of these controls has been a concern for regulators.
TradeHill now has US$400,000 in seed funding in its new iteration and is targeting business and accredited investors. Newcomers will be given $75 in credit to explore the available trading options, but it will take US$10,000, equivalent to 200 bitcoins, to activate a full account.
According to James Varga, chief executive officer (CEO) of miiCard, referring to its security problems last summer: “Tradehill isn’t alone in their experience of identity theft. New account fraud in the US increased 50% last year, driven largely by identity theft. It is critical for businesses dealing in bitcoin or any other regulated financial service to provide a level of trust and confidence for their customers while meeting compliance thresholds.”
CFTC to Regulate Bitcoin?
Separately, the worries about bitcoin’s stateless status, which is part of the attraction for many users of the cyber-currency, seems to be growing after Bart Chilton, one of the five commissioners at the US CFTC told the ‘FT’ the currency “is for sure something we need to explore”. The regulator is understood to be “seriously” examining the issue of whether the currency should fall under its remit.
As Chilton explained: “It’s not monopoly money we’re talking about here – real people can have real risk in these instruments, and we need to ensure that we protect markets and consumers, even in what at first blush appear to be ‘out there’ transactions.”
The CFTC traditionally regulates derivatives contracts and has not previously got involved in cash markets unless exchanges, such as TradeHill, list foreign exchange (FX) or other derivatives based upon them so the US regulator couldn’t interfere with ordinary goods being purchased or sold online with the digital currency, but may get involved with corporations trading with it on the financial markets or treasurers seeking to hedge with bitcoin instead of gold.
“In essence, we’re talking about a type of shadow currency, and there is more than a colourable argument to be made that derivative products relating to Bitcoin falls squarely in our jurisdiction,” Chilton told the ‘FT’.
In March, a branch of the US Treasury department said that all firms that exchange or transfer the virtual currency will be considered “money services businesses”, as it sought to bring the currency under control. This means that users must now provide information to the US government and introduce AML policies as TradeHill has done with miiCard, or alternatively move offshore.
Since the ruling, at least three companies in North America have reported having their business accounts closed by their banks. Bitfloor, a New York-based bitcoin exchange, said it was shutting down entirely, and it has not yet been able to return funds to customers, while Roger Ver, founder of Bitcoinstore.com and an investor in start-ups for the cyber-currency, has warned of others heading off to Panama to set up. Bitcoin is a world currency after all, and seeking to contain it in national boundaries takes away its raison d’etre.
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